February 2014

02/25/2014

Have you ever "put a pencil" to what your accounting function costs you each year? While outsourcing all or a portion of your finance operation is the way of the future, most businesses still do that work in house.

So the question is how much does it cost you to keep it in house?

Here is a quick way to get a big-picture idea of your total spend in that area. Drop the annual cost for each item in the blanks below.

You are going to see more and more professional services firms and CPAs providing a complete finance function service in the coming months and years. A service that goes way past what CPAs and bookkeepers currently provide.

The convergence of new technology, together with seasoned financial professionals, is about to change how entrepreneurs and CEOs think about the financial side of their business.

Knowing your costs will help you evaluate whether the new trend could help you save money while at the same time providing you more insightful and timely financial information.

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02/18/2014

Here is the best book written on forecasting and projections for serious minded entrepreneurs and CFOs. It is written by two experts in performance management, Steve Morlidge and Steve Player.

If you believe that knowing what's about to happen in your business financially is important, you are going to love the insights in Future Ready.

I always read a book with pen in hand. Man, did I make lots of notes and stars throughout this book. This is the kind of book I go back to regularly as I work with clients. (And not just because it is now autographed by Steve Player himself!!!!)

He tells a super cool story on pages 10 and 11 about a meeting of the Beyond Budgeting Round Table in New York. One of the top financial analysts on Wall Street was going to speak to the group about what he looks for from a company regarding a view into where their business is headed. Here is the short version from the book:

"If you are in charge of a business and can't tell me what is going to happen at the end of the quarter then I suspect that you don't know what you are doing. On the other hand, if you can tell me exactly what is going to happen in a year's time then you are either a fool or a liar.

… It is a common misconception among managers that "Wall Street" demands that businesses accurately predict the future. This view simply does not stand up to scrutiny.

… What I, as an experienced analyst, want from you is a projection with some ranges around it, a good idea of what is driving the uncertainty and a convincing plan of how you are going to mitigate the risk or exploit the opportunity. I can then do something you can't do; I can go and ask your competitors the same question and based on that I will make the judgment about whether you are a good investment or not."

The authors then go on to say:

"So, according to this knowledgeable source, the market doesn't demand that you predict the future. It does expect that you have a good grasp of what might happen and are well prepared to deal with it. Isn't that just good, common sense?"

Think about that for a minute in your own business.

Do you understand your business enough to create a projection of what is likely to happen in the coming months?

Can you identify the areas of uncertainty that your management team will have to deal with to hit your targets?

Do you have a plan for mitigating the risks that could derail your plans?

How are you going to exploit opportunities to improve your profitability and cash flow?

And one final quote that is very important about forecasts:

"We argue that we do not need accuracy from a forecast process – we need reliability. By reliability, we mean forecasts that are accurate enough for our purpose: decision-making"

A great reminder that forecasts/projections are not about precision… they are about helping you make better decisions and confront reality.

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02/10/2014

My advice about the confusion between owner compensation and profits created some interesting discussion recently. Some was from CPAs who work closely with business owners and entrepreneurs to help them better understand and manage the financial side of their business.

Here is a quote from one CPA who joined in the conversation:

"It's not just compensation that business owners confuse with profits. I have clients who continually think that their business income is related to the amount of distributions that they are taking from the business rather than the actual results of operations."

Her point goes to the heart of why helping you understand what's really going on with your cash is so important to me. Just because you have some cash in the business doesn't mean you should take it out. And it doesn't mean it represents "profit".

One more quote from a CPA:

"The confusion some business owners experience is confusing profitability with cash flow. I have lost a few clients over the years due to the fact that the Corporate Income Tax Return showed a profit while the cash position was minimal and the Line of Credit was fully extended. Hard to understand that all expenditures are not expenses."

One of the exciting things I have found is that when an entrepreneur begins to really understand cash flow (and the financial side of their business in general), they realize they have been accepting mediocre financial results from their business.

They begin to dive into their financials and review the key drivers of profitability and cash flow. They start to see that the business needs to perform at a higher level financially.

02/03/2014

Most business owners work in their business as well as own some or all of the business. Most draw a salary… some don't. Those that don't draw compensation look at the bottom line for the month or for the year and call that their "profit".

Big mistake!

In business, the people running the business get paid a market-based salary. They are the management of the company.

The owners of the business expect a return on their investment and for the risk they are taking by being owners. Profit, or net income, is an indicator of the return being generated for the owners.

When you are both working in your business and you are an owner of the business, it is easy to look at the money available to you as "profit". But it isn't.

Try this Little Exercise

Take a look at your P&L over the last twelve months or so and write down the profit number. Then add back the compensation you were paid. Then deduct what it would cost you to hire someone to do the job you do in the company.

The result is the true profit being generated for the owners.

Then evaluate whether the profit is really as high as it needs to be.

Maybe that becomes your number 1 goal for the coming year.

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